Governing Bodies of the Corporation

Shareholders. Theoretically, the shareholders, as the owners, are the

ultimate governing body of the corporation, but in practice most indi-

vidual shareholders in large corporations accept the recommendations

of management. Indeed, the more shareholders there are, the less real

influence each one has on the corporation. However, some sharehold-

ers have more influence than others. For one thing, some people own

stock that carries no voting rights, while others own shares that are worth

one vote each. Furthermore, some people (or organization) own more

shares with voting rights than others do.

In the last 20 years institutional investors such as pension funds, in-

surance companies, and college endowment funds have accumulated an

increasing share of the stock in the nations corporations. These large

institutional investors want the value of their stock to increase, and they

are beginning to play a more powerful role in governing the corporation

in which they own shares. At least once a year, all the owners of voting

shares are invited to a meeting to choose directors, select an indepen-

dent accountant to audit the company’s financial statements, and attend

other businesses. Shareholders who can’t attend the annual meeting in

person vote by proxy, signing and returning a slip of paper that autho-

rizes management to vote on their behalf.

Board of directors. As a practical matter, the board of directors, which

represents the shareholders, is responsible for guiding the corporate af-

fairs and selecting officers. Depending on the size of the company, the

board might have anywhere from 3 to 35 directors, although 15 to 25 is

the typical range. The board has the power to vote on major management

decisions. The board’s actual involvement in running a corporation var-

ies from one company to another. Often, the board of directors acts as

a “rubber stamp”, simply approving management’s recommendations.

This role is common where a majority of the board members are also

managers and where management ensures that only people who support

management’s interests are elected to the board.

Officers. The real power in a corporation often lies with the chief ex-

ecutive officer (CEO), who is responsible for establishing the policies

of the company at the direction of the board. He may also be the chair-

man of the board, the president of the corporation, or both. Officers just

below top rank, including most vice presidents, are generally appointed

by the chief executive officer and approved by the board. A top officer

who fails to carry out the board’s wishes may be removed, although this

happens relatively rarely.

Employees. To an increasing degree, employees are also becoming

more involved in governing the corporation. They are doing this through

a variety of vehicles, one of which is the employee stock ownership plan

(ESOP), a program that encourages employees to buy shares of stock in

the company for which they work.

Text 3